International trade growth has slowed over the last five years and the World Bank calculates that, in 2016, the slowdown was mostly due to global geopolitical uncertainty. Events such as Brexit have destabilized long-standing trade relationships, yet much of the current uncertainty centers on the unknowns of U.S. trade policy.

Most of the decline in world trade was concentrated in raw materials and industrial machinery used to produce the raw materials. In the meantime, global trade in consumer products continued to grow. This correlates with global economic data showing a decline in investment spending while retail spending in the world’s largest economies grew at or above GDP growth rates. As commodity prices stage a comeback, it is likely that global trade in industrial machinery will pick up.

Meanwhile, President Trump has already withdrawn from the 12-nation Trans-Pacific Partnership (TPP) and is actively calling for a sovereignty policy that is not bound by international mechanisms like the World Trade Organization. He also has said that his administration will renegotiate NAFTA (the North American Free Trade Agreement).

Where are we now with NAFTA?

NAFTA, a free trade agreement established in 1994 between Canada, Mexico and the United States, was established to help align Mexico’s economy with its northern neighbors. It was meant to be a win-win, creating a new market for U.S. and Canadian exports, while improving incomes in Mexico, where per capita income was just 30 percent of that in the United States. But critics believed the move would result in American and Canadian job loss, with jobs flowing to lower-cost markets like Mexico.

Since then, Mexico’s economy has grown, with the nation signing other bilateral and multilateral trade agreements, generating significant foreign investment and investing heavily in port infrastructure. The United States, for its part, has become a significant exporter of manufacturing parts and corn to Mexico and, in turn, a major importer of fruits from Mexico. However, President Trump has said he believes Mexico has benefitted unfairly, taking jobs that should belong in the United States, and he has vowed to revisit NAFTA with specific regards to Mexico import policy.

What could a rethink of NAFTA mean?

An increase of tariffs on products brought from Mexico into the United States could spur U.S. consumers to buy more domestic products. It could also have a short-term negative impact on the supply chain facilities that support Mexican exports to the United States. Furthermore, low-cost inputs from Mexico help U.S. producers compete in global markets.

It’s possible, too, that Mexico would shift its trade priorities with other nations. For example, if U.S. trade falls off, Mexico could continue its upward trajectory of exports to China. Between 2014 and 2015, Mexico’s trade with China rose by 4.6 percent while its trade with the United States dropped by 3.5 percent.

Additionally, the U.S. may insist on a higher U.S. content in imports from Mexico. The most recent estimates from the U.S. Department of Commerce indicate that on average every $1 of imports from Mexico contains $0.40 of US exports to Mexico. This would be a far more positive outcome from a NAFTA revision.

What are the implications for the logistics and industrial real estate industries?

There’s no doubt that trade agreements can have a ripple effect on supply chain and logistics real estate and transportation. Right now, more than three-quarters of the goods traded annually between the United States and Mexico are moved over land, either via truck or rail. If NAFTA renegotiations reduce trade activity between the United States and Mexico, we can expect to see lower trans-border truck and rail volumes.

Meanwhile, reduced trade could affect investment in certain U.S. industrial property markets. Secondary logistics markets like Phoenix, San Diego, and Kansas City, which serve as key corridors for trade with Mexico, might be most exposed to risk if Mexico-U.S. trade declines.

However, other property markets could benefit. With major industrial warehouse and distribution centers already built in and around large population centers, it is likely that big logistics markets like Dallas, Northern California and Los Angeles would become the go-to for domestic business if imports drop off. That’s because these markets are already some of the nation’s busiest domestic trade corridors, making them a natural choice for increased domestic trade flow.

How do you see changes to trade agreements impacting real estate decisions?

Questions surround the future of trade policy, not only based on U.S. actions, but also Mexico’s upcoming presidential election in July 2018. This uncertainty could prompt companies to take a wait-and-see approach to industrial real estate decisions, which could in turn curb momentum in the market.

But overall, the industrial and logistics real estate sectors are in a relatively strong position to weather uncertainty. In the United States, growth is already being driven by a powerful combination of low interest rates, healthy consumer spending and strong e-commerce. Potential investment in infrastructure and corporate expansion are also likely to fuel warehouse and distribution space demand, regardless of global economic uncertainty.